Journal of Business Research 118 (2020) 271–285

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Journal of Business Research

journal homepage: www.elsevier.com/locate/jbusres

A tiger with wings: CEO–board surname ties and agency costs T

a,⁎ a,⁎ b a,c
Liang Zhang , Zhe Zhang , Ming Jia , Yeyao Ren
a
School of Management, Xi’an Jiaotong University, China
b
School of Management, Northwestern Polytechnical University, China
c
College of Business in City University of Hong Kong, Hong Kong

ARTICLE INFO ABSTRACT

Keywords: Although corporate governance literature recognizes the influence of acquired social ties between CEOs and
Surname ties directors, innate social ties are hardly explored. To extend this literature, this study examines how CEO–board
Agency costs surname ties influence agency costs. Drawing on social identity theory, we first develop the argument that
Corporate governance CEO–board surname ties result in increased agency costs. We then employ agency theory to examine the
Social identity theory
boundary conditions under which such directors are less likely to act as group members of surname ties.
Agency theory
Specifically, we consider three key governance tools as such conditions, namely, monitoring by shareholders,
aligning directors’ interests with firm value, and aligning supervisors’ interests with firm value. We find em-
pirical support for our arguments by using a sample of 16,926 listed firms and 165,287 directors in China from
2005 to 2015. We discuss the contributions to corporate governance literature and elucidate the practical im-
plications of our findings.

1. Introduction background, and political orientation, influence governance outcomes

As corporate “apex of decision control systems,” boards of directors
are the primary and prominent governance mechanisms that monitor
managers and protect shareholders’ interests (Fama & Jensen, 1983, p.
311). However, certain studies suggest that directors are likely in-
effective controllers and monitors and even become “conspirators” or
“puppets” of executives (e.g., Hwang & Kim, 2009; Westphal, 1999;
Westphal & Zajac, 1995). Scholars of behavioral perspectives on cor-
porate governance argue that it is mainly because directors’ psycholo-
gical biases potentially restrict board monitoring (Gupta & Wowak,
2017; Lee, Lee, & Nagarajan, 2014). They emphasize the role of social-
psychological factors (e.g., CEO–board social relations) in governance
outcomes (Boivie, Lange, McDonald, & Westphal, 2011; Westphal &
Zajac, 2013; Zhu & Westphal, 2014). In this view, directors are “socially
situated and constituted agencies,” who construct decisions based on
their “multiplex roles and identities” embedded in their social lives and
relationships (Westphal & Zajac, 2013, p. 624).
Therefore, a flourishing body of governance research pays attention
to social ties between CEOs and directors, which likely elicit directors’
psychological biases in evaluating executives and hence affect agency
conflicts and agency costs. However, this literature reveals two major
gaps. First, most studies on CEO–board social ties focus on how achieved
or acquired social ties, such as mutual alma mater, professional
(e.g., Fracassi & Tate, 2012; Hwang & Kim, 2009; Lee et al., 2014;
Westphal, 1999). However, limited attention has been given to ascribed
or innate social ties (e.g., surname), which are formed once individuals
are born (Tsui & Farh, 1997). As the “roots” of individuals, innate
characteristics tend to accompany them throughout life and influence
their interactions with others and their decisions. For example, Kish-
Gephart and Campbell (2015) suggest that executives’ social class ori-
gins have a lasting impact on their tendency to take risks. Compared
with achieved ties, ascribed ties are more likely to be a basis of group
identity because of their higher visibility to in- and out-group members
and are more exogenous for governance outcomes (Gompers,
Mukharlyamov, & Xuan, 2016).
Second, the boundary conditions of relationship between
CEO–board social ties and governance outcomes remain unsettled.
Although behavioral governance literature sheds valuable insights into
the effect of agencies’ social-psychological factors on governance out-
comes, the findings are equivocal. Hwang and Kim (2009), for example,
indicate that social-psychological factors (e.g., CEO-director social ties)
impair board independence and reduce firm performance. However,
other studies hold that such factors are not determinant (Gompers et al.,
2016; Hoitash, 2011; Harris, Karl, & Lawrence, 2019). These studies
failed to consider the role of agencies’ economic rationality as a
boundary condition of the relationship between social ties and

⁎
Corresponding authors at: Xi’an, Shannxi 710049, China.
E-mail addresses: 13772073171@163.com (L. Zhang), zhangzhe220@sina.com (Z. Zhang), jiaming@nwpu.edu.cn (M. Jia), 18294413280@163.com (Y. Ren).

https://doi.org/10.1016/j.jbusres.2020.06.026
Received 14 February 2019; Received in revised form 10 June 2020; Accepted 11 June 2020
Available online 07 July 2020
0148-2963/ © 2020 Elsevier Inc. All rights reserved.
L. Zhang, et al.
governance outcomes. This angle may help us explain such conflicting
results because directors conduct monitoring activities not only as so-
cial actors with multiple roles and identifies but as rational agents of
shareholders (Hillman, Nicholson, & Shropshire, 2008). In addition to
social-psychological factors, economic rationality also impacts direc-
tors’ decisions (Gupta & Wowak, 2017; Harris et al., 2019). Thus, it
would be valuable to examine and clarify the boundary conditions
under which directors are more likely to act in an economic manner
than as group members of social ties. Doing so furthers our under-
standing of the interactions between directors’ social and economic
roles.
To fill the mentioned research gaps, this study draws on social
identity theory and agency theory to examine (1) whether and how
surname ties between a CEO and directors influence agency costs and
(2) the boundary conditions under which such directors are less likely
to act as group members of surname ties but may act as rational agents.
Surname ties are one form of innate social ties. Similar to a genetic
locus on the Y chromosome, a surname can be transmitted along gen-
erations virtually unchanged as a “reliable genetic marker” in patri-
lineal systems (Gymrek, McGuire, Golan, Halperin, & Erlich, 2013;
Manni, Heeringa, Toupance, & Nerbonne, 2008, p. 41; Sykes & Irven,
2000). Therefore, a shared surname is a sign of the ancestral relation-
ship among people (Jacobs, 1979; Langenberg, 2007; Liu, Chen, Yuan,
& Chen, 2012). Du (in press) suggests that “the shared surname on
individual behavior and corporate decisions is still a pending but im-
portant problem.”
Specifically, drawing on social identity theory (Ashforth & Mael,
1989; Tafjel & Turner, 1986; Turner, 1987), we argue that surname ties
motivate the CEO and directors to classify themselves into the same
group. Because of in-group biases or favoritism elicited by surname ties,
directors are biased in evaluating and monitoring the CEO’s self-serving
activities, thereby increasing agency costs. Furthermore, we examine
how this relationship is contingent upon corporate governance tools
based on agency theory. This theory highlights directors’ roles as ra-
tional agents of shareholders and introduces governance tools to miti-
gate agents’ biased behaviors (e.g., directors’ biases triggered by sur-
name ties) (e.g., Jensen & Meckling, 1976; Jia, Huang, & Man Zhang,
2019). Therefore, we consider three key governance tools—monitoring
by shareholders, aligning directors’ interests with firm value, and
aligning supervisors’ interests with firm value.
In addition, to extend the literature on surname ties, we conduct a
series of further analyses that investigate (1) whether surname ties are
harmful to firm performance; (2) the potential benefits of surname ties;
(3) why directors do not care about their reputation in the labor market
and the reputation of the surname-ties group to show their biased
evaluation on the CEO; (4) how CEO–director dialect similarity influ-
ences the effect of surname ties on agency costs.
We find empirical support for our overall theory by using a sample
of 16,926 listed firms and 165,287 directors in China from 2005 to
2015. Our results show that CEO–board surname ties increase agency
costs and this relationship weakens when firms have strong monitoring
by shareholders or when directors’ or supervisors’ interests are closely
aligned with firm value. We select China as the empirical context for
several reasons. First, given that formal systems and institutions in
China are underdeveloped and incomplete, informal institutional con-
straints, such as interpersonal ties, may play an important role in af-
fecting economic exchanges and corporate governance (He, Pittman,
Rui, & Wu, 2017; Xin & Pearce, 1996). Second, the influence of surname
ties can be easily observed in China because of its Confucian culture,
which attaches considerable importance to the sense of family and
ancestry (Du, 2016). Third, the Chinese do not change their surnames
generally (Liu et al., 2012), hence ensuring the validity of CEO–board
surname ties as the independent variable.
Departing from a majority of board research that has focused on
Western countries, we provide a new context (i.e., China) to examine
directors’ social ties. This context is interesting because Chinses people
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Journal of Business Research 118 (2020) 271–285
attach great importance to social and family ties (Du, 2016; He et al.,
2017), yet little scholarly attention has been given to how these ties
influence directors’ behaviors. This study contributes to corporate
governance literature in several ways. First, rather than focusing on
acquired social ties, this study examines one form of innate social ties,
namely, CEO–board surname ties. In addition, it adds to the literature
on the antecedents of agency costs. Second, a noteworthy contribution
that we make to behavioral governance literature (Hillman et al., 2008;
Westphal & Zajac, 2013) is to identify when and why socially situated
and constituted agencies may act as economic actors. Finally, this study
extends the literature on surname ties by reasoning why in-group fa-
voritism elicited by surname ties occurs, introducing governance tools
to reduce such favoritism, and revealing the potential benefits of sur-
name ties.
2. Literature review
In this part, we first review the literature on different perspectives
on corporate governance. Economic perspectives treat directors as
purely economic actors; in contrast, behavioral perspectives assume
directors’ behaviors as a function of their social identities and roles. We
then review the literature on surnames to explain the implications of
surname ties to people.
2.1. Economic and behavioral perspectives on corporate governance
Economic and behavioral perspectives on corporate governance
propose different theoretical lenses on directors’ decisions and beha-
viors. Economic perspectives assume economic rationality as the dri-
vers of directors’ behaviors and emphasize the role of formal structures
and systems in aligning the interests of owners and directors. Such
perspectives form the basis of agency theory (Fama & Jensen, 1983;
Jensen & Meckling, 1976). With the separation of ownership and con-
trol, firm power is delegated to managers (executives). Managers may
conduct self-serving activities to maximize their own interests at the
expense of shareholders. Agency theorists argue that the primary duty
of directors is to control managerial opportunism (i.e., managers’ self-
serving and unethical behaviors) and to ensure that corporate decisions
carried out by managers are in the best interests of owners, thereby
reducing agency conflicts (e.g., Hillman & Dalziel, 2003).
However, empirical results on the role of directors in reducing
agency costs are ambivalent. According to agency theory, independent
directors should control CEOs’ self-serving and irresponsible behaviors,
thus increasing firm value and reducing agency costs (Liu, Miletkov,
Wei, & Yang, 2015; Rashid, 2015). However, this relationship has re-
ceived little support from other studies (Ramdani & Witteloostuijn,
2010; Singh & Davidson, 2003). Such inconclusiveness shifts scholars’
focus away from directors’ economic rationality and toward their psy-
chological biases and social relationships, which may affect board
monitoring (Hillman et al., 2008; Lee et al., 2014).
Therefore, scholars propose behavioral perspectives on governance,
which hold that directors’ social-psychological factors “play a central
role” in decisions and behaviors (Gupta & Wowak, 2017, p. 5; Westphal
& Zajac, 2013). Such perspectives suggest that “the molecule of all
social life is the socially constructed and socially situated individual,
who lives, acts, and develops within a set of proximate social re-
lationships, institutions, norms, and rules” (Little, 2012, p. 143). As
socially situated and socially constituted agencies, directors conduct
monitoring activities as social actors whose motives are derived from
multiple roles and identities they accumulate through social relation-
ships and socialization (Westphal & Zajac, 2013). For example, Lee
et al. (2014) demonstrate that alignment in political orientation be-
tween CEOs and directors leads to increased agency conflicts. Hwang
and Kim (2009) demonstrate that CEO–board social ties (i.e., mutual
alma mater and military service) inhibit board monitoring and thus
increase agency costs. According to such behavioral perspectives,
L. Zhang, et al.
directors’ social identities elicited by social-psychological factors can
affect board decisions and the effectiveness of board monitoring.
Consequently, a large body of literature examines how CEO–board
social-psychological factors (e.g., social ties) influence board mon-
itoring. Most of studies examine that how achieved or acquired social
ties, such as mutual alma mater, military service, professional back-
ground, employment experience, education level, and political or-
ientation influence governance outcomes (e.g., Fracassi & Tate, 2012;
Hwang & Kim, 2009; Lee et al., 2014; Westphal, 1999; Westphal &
Zajac, 1995). However, ascribed or innate social ties between CEOs and
directors have been receiving little attention. The “roots” of individuals,
including corporate decision makers, have important influences on
their decisions and behaviors (Kish-Gephart & Campbell, 2015). Com-
pared with achieved ties, ascribed ties are more visible to in- and out-
group members and thus more likely to elicit individuals’ psychological
biases. The influence of ascribed ties on corporate governance is more
exogenous than achieved ties, because shareholders tend to select di-
rectors based on their ability-related characteristics (e.g., educational
background and employment experience) rather than their innate
characteristics (Gompers et al., 2016). Therefore, governance research
on innate ties incurs little endogeneity issues related to self-selection
biases.
2.2. Implications of surname ties
Surnames signify people’s blood relationships, which are basic so-
cial ties (Jacobs, 1979; Peng, 2004). Surname ties have considerable
implications for people, especially the Chinese. First, it is due to his-
torical factors. The culture of Chinese surnames has continued and
developed throughout the last 5000 years. In 2852 BC, Emperor Fuxi
established surnames to distinguish among clans and to conduct a
census. Discovering the harm of consanguineous marriages, Xi Zhou
dynasty (1046 BC–771 BC) stipulated that people in the same clans (i.e.,
sharing the same surname) should not marry. This concept still plays a
role in certain rural areas of modern China. As the population grows,
the number of surnames increases sharply. Nowadays, more than
20,000 surnames exist, but merely 100 of them are common (called
“one hundred surnames” in Chinese; see Appendix A).
Second, surnames are preserved well through generations as a sign
of honor or dignity of Chinese people. Unlike citizens in western
countries, Chinese women keep their surnames unchanged after mar-
riage. Children’s surnames are generally inherited from their fathers.
Men are considered impuissant, and social discrimination may incur if
their surnames cannot be endowed on their children after marriage.
This phenomenon is called “son-in-law by adoption” (“Ruzhui” in
Chinese).
Third, surname ties are an important basis of self-identity and social
identity for people. Deeply influenced by Confucian culture, people
attach considerable importance to the concept of “self in relation to
other” (Tsui & Farh, 1997, p. 60) and “one’s obligations to kin” (Peng,
2004, p. 1049). Different from the western view of an independent self,
guanxi or interpersonal ties are always the most important clue for the
Chinese in forming their views and identities of society. People with the
same surname always consider themselves and are believed to have the
same ancestors (Jacobs, 1979; Langenberg, 2007, p. 61). Consequently,
they categorize themselves into the same social group based on this
ancestral relationship.
Consistent with the view that a shared surname signals a common
ancestor, previous studies find that surnames can be used as proxies to
identify race and ancestry (Cheng, 2012; Shah et al., 2010; Waters,
1989), to identify the distribution of dialect pronunciations (Manni
et al., 2008), and are reliable identifiers for the genetic locus on the Y
chromosome (Gymrek et al., 2013; Manni et al., 2008, p. 41; Sykes &
Irven, 2000).
Fourth, surname ties among people can shorten their social distance
and improve their group identity (Charness & Gneezy, 2008; Tsui &
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Journal of Business Research 118 (2020) 271–285
Farh, 1997). From ancient to modern times, Chinese with the same
surname have always practiced the custom of inheriting family gen-
ealogy and building clans, which were paramount social organizations
in pre-modern China (Greif & Tabellini, 2017). Doing so allows them to
promote clan culture, help each other (e.g., defend against enemies),
and enhance cooperation. Nowadays, Chinese people with the same
surname still construct and maintain ancestral halls (“Ci Tang” in
Chinese), which are used for sacrifices, meetings for affairs, recording
or commending great people (i.e., Hall of Fame), and the manifestation
of their clans’ reputation and prestige. “These cultural practices help
reinforce the bond between clan members, create group identities, and
forge solidarity” (Peng, 2004, p. 1050). Hence, people with the same
surname always show favor and generosity to each other.
Consequently, scholars examine how clan culture or surname ties
affect corporate outcomes. In the early stages of market reform, private
entrepreneurs largely rely on informal norms for security because of
ineffective legal protection. Peng (2004) suggests that kin solidarity and
kin trust embedded in clan culture protect the property rights of private
entrepreneurs against cadre predation and political discrimination,
which are the greatest obstacles to the development of private en-
trepreneurship. Audit firms face great competitive pressures in China,
where signing auditors may submit to managers and lose their in-
dependence in order to retain clients, especially when auditors have
social ties with the CEO (Du, in press; Wang, Wong, & Xia, 2008). Given
that clan culture based on shared surnames motivate people to form
group identity, in-group favoritism may occur. Du (in press) finds that
such favoritism impairs the independence of signing auditors who share
surnames with the CEO and thus increase the likelihood of corporate
financial misstatement.
3. Hypothesis development
In this section, we develop four hypotheses. The first hypothesis
examines the relation between CEO–board surname ties and agency
costs. The remaining hypotheses examine the boundary conditions of
this relationship, i.e., how governance tools—monitoring by share-
holders and aligning directors’ or supervisors’ interests with firm va-
lue—weaken this relationship.
3.1. CEO–board surname ties and agency costs
Drawing on social identity theory, we elucidate how CEO–board
surname ties increase agency costs. According to this theory, people
routinely classify themselves and others into social categories in order
to locate or define themselves in a social environment (Ashforth &
Mael, 1989; Tafjel & Turner, 1986; Turner, 1987). Such categorization
may occur “automatically and without conscious awareness”
(Hewstone, Hantzi, & Johnston, 1991, p. 579). People always cate-
gorize themselves and others based on some visible or readily ob-
servable characteristics such as surname (Du, in press; Jacobs, 1979),
race (Hewstone et al., 1991), and gender (Westphal & Stern, 2007).
Social identity theory argues that social categorization can lead to
in-group or out-group biases consciously or unconsciously (Ashforth &
Mael, 1989; Brewer, 1979). That is, people show a positive bias when
evaluating others who have similar characteristics such as surnames
and a negative bias toward out-group people, who do not have such
characteristics. Consequently, “ultimate attribution error” likely occurs
because people always attribute positive behaviors of in-group mem-
bers to internal traits such as ability and attribute their negative be-
haviors to external causes (Hewstone, 1990; Westphal & Stern, 2007, p.
271).
Considering the behavioral perspectives on governance, corporate
decision makers (e.g., executives and directors), who are socially si-
tuated and constituted agencies, can have multiple social identities that
are based on observable features (Westphal & Zajac, 2013). We argue
that a CEO and relative directors classify each other into social groups
L. Zhang, et al.
based on shared surnames. In-group biases or favoritism elicited by
such ties inhibit the directors’ monitoring and control of the CEO’s self-
serving behavior, thereby increasing agency costs.
First, surname ties between executives and directors can be im-
portant conduits for their categorization. Throughout time, Chinese
people persistently attach great importance to kinship. Kinship has a set
of norms about social life and family education, which impacts in-
dividuals’ values and behaviors (Peng, 2004). As a sign and symbol of
kinship, surnames bond people together and bring them a sense of
belonging (Greif & Tabellini, 2017). Nowadays, people with the same
surname are considered to have a common ancestor (Langenberg,
2007). Chinese people hardly change surnames because surnames are a
sign of dignity and a key to identify ancestors. To inherit the notion of
respect for ancestors, Chinese fathers often educate children, “because
you are a member of our clans, I hope that you can bring honor to our
ancestors in the future” (“Guang Zong Yao Zu” in Chinese). Thus, the
ancestral relationship based on surnames likely motivates people to
categorize them into the same social groups (e.g., the same clans)
consciously or unconsciously. For example, the picture that appears in
the minds of Chinese people is of their common ancestral halls or clan
groups when they share the same surname. Given the under-
development of formal institutions (e.g., laws and rules) in China,
managers often rely on informal ties (e.g., social ties and culture) to
conduct their decisions and behaviors (Du, 2016; He et al., 2017). Thus,
directors and the CEO may classify them into the same group based on
shared surnames.
Second, in-group biases or favoritism derived from shared surnames
occur when directors evaluate the CEO. This is because surname ties
shorten social distance among people, such as showing favor and gen-
erosity to one another and “creating group identities” (Peng, 2004, p.
1050). Clan organizations expect their members to “assist each other in
any way that may be required (Greif & Tabellini, 2017, p.5).” Biases or
favoritism occur among surname-sharing people. Charness and Gneezy
(2008) find that dictators allocate more pie to people whose surnames
are revealed than those with anonymity in a dictator game. Citizens
might vote for a candidate who shares the same surname with them in
elections (Jacobs, 1979). Thus, directors who share surnames with a
CEO likely exhibit empathy and favoritism toward the CEO and slightly
criticize the CEO.
Such biases inhibit board monitoring and increase the CEO’s self-
serving behavior. According to social identity theory, the attribution
error likely occurs among in-group members. We thus argue that di-
rectors may make excuses for the self-serving behaviors of the CEO who
share the same surnames with them. For instance, when receiving and
entertaining visitors from governments and other organizations, a CEO
likely consumes the firm’s resources to pursue his/her own interests
(e.g., obtain appointments in governments). Surname-sharing directors
may attribute the CEO’s high entertainment expense on visitors and
himself/herself to the demand of building corporate networks. These
directors may also attribute good team performance to the CEO’s out-
standing leadership and competence and attribute bad firm perfor-
mance to external causes, and thus paying the CEO excessive salaries
and bonuses. Consequently, such biased evaluation of the CEO lessens
the effectiveness of board monitoring in preventing the CEO’s self-ser-
ving behavior.
Finally, agency costs increase because the effectiveness of board
monitoring in preventing the CEO’s self-serving behavior is lessening.
According to corporate governance research, agency costs include costs
used to prevent the CEO’s self-serving behavior and “those incurred
when such behavior is not prevented” (Boivie et al., 2011, p. 551;
Jensen & Meckling, 1976). In sum, CEO–board surname ties elicit in-
group biases or favoritism, which inhibits directors’ monitoring and
control of the CEO’s self-serving behavior, thereby increasing agency
costs. Therefore, we propose the following hypothesis.
Hypothesis 1 (H1). CEO–board surname ties are positively associated
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Journal of Business Research 118 (2020) 271–285
with agency costs.
3.2. Boundary conditions of the relationship between surname ties and
agency costs
It would be valuable to investigate when and why socially situated
and constituted agencies are more likely to act economically. Scholars
of behavioral perspectives predict that social-psychological factors
largely determine the behaviors of socially situated and constituted
agencies (e.g., directors and CEOs) and firm performance (Fracassi &
Tate, 2012; Hwang & Kim, 2009). However, other studies find that such
factors are not determinant (Gompers et al., 2016; Hoitash, 2011;
Harris et al., 2019). These studies failed to consider the role of agencies’
economic rationality as a boundary condition of the social ties and firm
outcomes relationship. This issue is a worthwhile subject because di-
rectors act not only as group members of social ties but also as rational
agents of owners (Gupta & Wowak, 2017; Hillman et al., 2008). For
example, a director may have identities associated with his/her role as
a parent, a son, and a member of a basketball team or other social ties;
he/she is also the agent of owners and should perform the duty. Thus,
scholars warrant future research on the integration of multiple theo-
retical lenses to clarify such conditions (Boyd, Haynes, & Zona, 2011;
Christopher, 2010).
Previous studies on economic and behavioral perspectives indicate
that treating directors either as social or economic actors alone would
result in conflicting findings, which hinders our understanding of di-
rectors’ behaviors (Hillman et al., 2008). The integration of the per-
spectives from economic and behavioral governance can be useful to
explain the inconclusiveness. For example, integrating gender sociali-
zation theory with agency theory, Harris et al. (2019) find that female
CEOs are not necessarily risk-averse and exhibit similar economic be-
haviors (i.e., earnings management) to male CEOs at high levels of
equity-based compensation. Hence, the limited influence of social-
psychological factors on directors’ behaviors can be attributed to their
economic rationality.
However, previous studies examined directors’ social roles and ra-
tional agents separately. Behavioral governance literature mostly fo-
cuses on when socially situated and constituted agencies (e.g., direc-
tors) are more likely to act as social actors (Du, in press; Westphal &
Zajac, 2013). For instance, Du (in press) find that a CEO and auditors
are more likely to act as group members of surname ties when they
establish another social identity based on hometown relationship.
However, little is known about when and why such agencies are more
likely to act in an economic manner than as group members of social
ties.
Drawing on agency theory, we examine such boundary conditions.
This theory emphasizes directors’ economic rationality and introduces
corporate governance tools, including monitoring mechanisms and in-
centive schemes, to improve board monitoring and reduce agency
conflicts (e.g., Hillman & Dalziel, 2003; Jia et al., 2019; Pepper & Gore,
2015). These tools can force or motivate directors to act as rational
agents of owners and prevent them from engaging in certain activities
that increase agency costs. Such activities include directors’ biased
evaluation of CEOs and their reduction in monitoring due to CEO–-
director social ties (Westphal, 1999) or group and social identities
(Hillman et al., 2008). Therefore, we consider whether surname-sharing
directors exhibit economic behaviors in the face of corporate govern-
ance tools.
Agency theorists suggest that modern firms have “two key corporate
governance practices” that control the agency risk (Jia et al., 2019, p.
223), including the monitoring of owners and aligning agents’ private
interests with firm value (Dharwadkar, Goranova, Brandes, & Khan,
2008; Shleifer & Vishny, 1997). Accordingly, we consider three im-
portant governance tools—monitoring by shareholders, aligning direc-
tors’ private interests with firm value, and aligning supervisors’ private
L. Zhang, et al.
interests with firm value. Given that supervisors (i.e., members of the
supervisory board) are important agents in monitoring CEOs and di-
rectors in many countries (e.g., Germany, Netherlands, and China), we
also considered the role of supervisor monitoring.
3.2.1. Monitoring by shareholders
With strong monitoring, shareholders are more likely to control
directors’ biases triggered by surname ties. Agency theorists suggest
that large shareholders provide more effective monitoring than free-
riding small shareholders because the former have more stakes in firms,
and thus have more incentives to monitor agents (Dharwadkar et al.,
2008; Hartzell & Starks, 2003; Pedersen & Thomsen, 2003). For in-
stance, Hartzell and Starks (2003) find that large shareholders can re-
duce executive compensation and increase pay–performance sensi-
tivity. Jia et al. (2019) indicate that the largest shareholders can
effectively control the moral hazard that arises from managers and
directors. Hence, when a shareholder exerts a stronger monitor on
agents’ actions, such actions are more likely aligned with the share-
holder’s interests.
As a result, the agents are more likely to act as rational agents of
shareholders and protect shareholders’ interests.1 Facing strong mon-
itoring, surname-sharing directors are less likely to show biased eva-
luation of the CEO. Otherwise, they may incur punishments (e.g., dis-
missal and decreased compensation) from shareholders. Hence, we
offer a hypothesis.
Hypothesis 2 (H2). The relationship between CEO–board surname ties
and agency costs will be weakened when firms have strong monitoring
performed by shareholders.
3.2.2. Aligning directors’ private interests with firm value
When directors’ private interests or incentives are more aligned
with firm value, they have a greater personal stake in protecting or
improving shareholder or firm value (Jia et al., 2019; Shleifer & Vishny,
1997). Compared with their counterparts whose interests are unaligned
with firm value, these directors have a stronger identification with
being shareholders and show more willingness to monitor executives
(e.g., Hillman & Dalziel, 2003; Hillman et al., 2008). Hence, these di-
rectors become vigilant and stringent in evaluating executives.
We expect that surname-sharing directors may act rationally to
pursue their own interests when their private interests are aligned with
firm value. In firms with directors whose private interests are aligned
with firm value, these directors can be group members of surname ties
and shareholders. Thus, their evaluations of the CEO are not simply
determined by surname ties but also by private costs and returns. The
costs of their biased evaluation on the surname-sharing CEO are high
due to a close alignment between their interests and firm value. As
mentioned, such biases increase corporate agency costs, which are
detrimental to firm value. To avoid these costs and protect private in-
terests, these directors may act as economic actors and proactively
lessen biases or favoritism. In addition, the CEO may conduct less self-
serving activities than before.
By contrast, when directors’ private interests are only slightly
aligned with firm value, their evaluations of the surname-sharing CEO
1
We consider the possible reasons that explain why large shareholders con-
sent to hire directors who share the same surname with the CEO. First, share-
holders likely attach more importance to directors’ ability-related character-
istics (e.g., past performance, educational background, and external networks)
than their innate characteristics when they select directors (Gompers et al.,
2016). Second, as our results shown in the “The potential benefits of surname
ties” part, surname ties improve the efficiency of decision making and thus have
potential benefits for firms operating in a dynamic environment. In such an
environment, shareholders may focus more on managers’ quick reactions and
fast decision making, which helps shareholders grasp new opportunities and
obtain long-term returns.
275
Journal of Business Research 118 (2020) 271–285
are largely determined by surname ties. In this case, these directors may
show more biases toward the CEO than their counterparts whose pri-
vate interests are more aligned with firm value, thereby inhibiting the
directors’ monitoring and exacerbating the CEO’s self-serving activities.
Therefore, we propose the third hypothesis.
Hypothesis 3 (H3). The relationship between CEO–board surname ties
and agency costs will be weakened when directors’ interests are more
aligned with firm value.
3.2.3. Aligning supervisors’ private interests with firm value
Listed firms in many countries, such as Germany, Netherlands, and
China, are required to adopt a two-tier board, a board of directors and a
supervisory board (e.g., Dahya, Karbhari, Xiao, & Yang, 2003; Farag &
Mallin, 2016; Maassen & Van Den Bosch, 1999). The main responsi-
bility of the supervisory board is to monitor the ethical conduct of CEOs
and directors, to review corporate financial reports, to take corrective
measures when the behavior of CEOs or directors is detrimental to
firms, and to propose shareholders’ temporary meetings (Farag &
Mallin, 2016; Ran, Fang, Luo, & Chan, 2015). We expect that the effect
of CEO–board surname ties on agency costs is weakened when super-
visors’ interests are more aligned with firm value.
The supervisory board is an important and effective monitor that
prevents and controls CEOs’ and directors’ self-serving and irrespon-
sible behaviors. First, the supervisory board has the power and re-
sponsibility to monitor CEOs and directors. For example, the Chinese
Company Law in 2005 stipulated that the supervisory board has the
power to call for shareholders’ decisions on the dismissal of CEOs and
directors. The supervisory board is appointed by shareholders and must
consist of shareholders and elected employees. Supervisors should hold
regular meetings and write reports about corporate affairs, which can
be important information channels for shareholders. Second, super-
visors are more effective monitors when their interests are more aligned
with firm value (Farag & Mallin, 2016; Ran et al., 2015). For example,
the presence of a supervisory board is conducive to improving the
quality of corporate governance (Dahya et al., 2003). Shareholding
among supervisors provides strong incentives for them to monitor CEOs
and directors in driving firms to enhance accounting information
quality (Ran et al., 2015).
Consequently, when supervisors’ private interests are more aligned
with firm value (i.e., stronger monitoring performed by the supervisory
board), surname-sharing directors may act rationally (i.e., lessen fa-
voritism toward the CEO) to avoid punishments and complaints from
the supervisory board. Hence, monitoring by supervisors may mitigate
the effect of surname ties. Therefore, we propose the following hy-
pothesis.
Hypothesis 4 (H4). The relationship between CEO–board surname ties
and agency costs will be weakened when supervisors’ interests are more
aligned with firm value.
4. Methodology
4.1. Data and sample
Our initial sample includes all firms listed on Shanghai and
Shenzhen Stock Exchanges from 2005 to 2015. Initially, we obtain
21,099 firm-year observations. Based on previous studies (e.g., Cao,
Lemmon, Pan, Qian, & Tian, 2019; Du, in press), we select our sample
by using the following criteria. First, we exclude firms pertaining to
banking, insurance, and other financial industries because these firms
have strikingly different financial characteristics compared with other
firms (344 observations). Second, we delete special and particular
treatment firms due to their abnormal financial conditions (717 ob-
servations). Third, we drop the outliers of net assets and CEO tenure,
specifically, those whose net assets (368 observations) and CEO tenure
L. Zhang, et al.
(294 observations) are below zero.2 Fourth, we eliminate firms with
unavailable data (2450 observations). Finally, we obtain an unbalanced
panel dataset of 2499 firms and 16,926 firm-year observations. The
final sample covers 18 industries (one-digit industry code).3 Among
these firms, 1248 unique firms, pertaining to 4400 firm-year observa-
tions, have CEO–board surname ties. Such ties exist in approximately
26% of the sample firms, with each firm having approximately 0.35
directors with the same surname as the CEO.
Our data are mainly derived from the Chinese Stock Market and
Accounting Research (CSMAR) database, which is widely used in pre-
vious studies (e.g., Cao et al., 2019; Sun, Hu, & Hillman, 2016). Spe-
cifically, we collect firms’ financial and corporate governance in-
formation from CSMAR’s Corporate Governance Research Database,
Stock Market Financial Information Database, Shareholder Research
Database, and Features of the Character Database. We also obtain
provincial-level data from the China Statistical Yearbook (CSY).
4.2. Dependent variables
Agency costs. Agency theorists argue that executives may perform
self-serving or unethical behaviors (e.g., excessive pay and perquisite
consumption) at the expense of shareholder value, thereby increasing
agency costs. Executives always use operating expenses, such as ad-
vertising, selling, and administrative expenses, to “camouflage ex-
penditures on perquisites” (Singh & Davidson, 2003, p.799). Following
previous studies (e.g., He & Luo, 2018; Rashid, 2015; Singh & Davidson,
2003), we measure agency costs as sales expenses and administrative
expenses scaled by the total annual sales. We compute the logarithm of
agency costs to mitigate the influence of skewed distributions.4 In China,
executives easily conceal their self-serving and unethical behaviors
(e.g., excessive consumption) via sales expenses and administrative
expenses because the undeveloped audit market cannot ensure audit
independence in examining company annals (Du, in press; He et al.,
2017).
4.3. Independent variables
Surname ties. Based on Du (in press), we calculate CEO–board sur-
name ties as an indicator variable, which equals “1” if a firm’s CEO
shares the same surname with (one or more) directors and “0” other-
wise.
4.4. Moderating variables
Shareholder monitoring. Consistent with previous studies (e.g., Jia
et al., 2019; Pedersen & Thomsen, 2003), we measure shareholder
monitoring by the proportion of firm shares owned by the largest
shareholder. As argued above, large shareholders are willing to exercise
strong monitoring over agents’ actions.5
Director share. Following prior studies (Hillman & Dalziel, 2003; Jia
2
Heckman two-step sample selection models showed that sample selection
bias did not exist if we dropped these observations.
3
These industries include agribusiness, mining, manufacturing, electricity,
water, oil and gas, construction, wholesale and retail, transportation, hotel and
catering, information technology, real estate, leasing, scientific research, water,
environment and public works, residents’ services, education, health and social
work, culture, sports and entertainment, and other industries.
4
The minimum, mean, and maximum values of agency costs (before taking the
logarithm) are 0.01, 0.16, and 1.58, respectively. The skewness and kurtosis of
agency costs (before taking the logarithm) are 3.9 and 29.4, respectively, which
deviate from the normal skewness (0) and kurtosis (3). Hence, it is better to take
the logarithm of agency costs.
5
Our results are consistent with our arguments when we remeasure share-
holder monitoring by the proportion of firm shares owned by the three or five
largest shareholders (Dharwadkar et al., 2008; Hartzell & Starks, 2003).
276
Journal of Business Research 118 (2020) 271–285
et al., 2019), we use director share to measure the degree of alignment
between directors’ private interests and firm value. Director share is
calculated as the shares owned by the directors divided by the firm’s
total shares. The directors holding many firm shares are more willing to
monitor executives than those with only a few shares.
Supervisor share. To measure the degree of alignment between su-
pervisors’ private interests and firm value, we measure supervisor share
as the proportion of firm shares owned by the supervisory board.
Research on corporate governance suggests that agents receive addi-
tional incentives to perform their monitoring duties when their private
interests are closely aligned with firm value (Ran et al., 2015).
4.5. Control variables
We control for a set of variables that can influence agency costs.
First, we include the following control variables at the firm level: firm
size (logarithm of total assets) and firm age (number of years since in-
ception). Managers are less likely to engage in self-serving activities in a
large firm because it is highly visible and exposed to intensive scrutiny
(Meznar & Nigh, 1995). Older firms can be more efficient than younger
counterparts due to the effects of learning curve (Ang, Cole, & Lin,
2000).6 We also control for industry adjusted ROA (return on assets)
and growth (ratio of the annual increase in sales revenues) because
profitable firms may have better monitoring mechanisms in controlling
managers (He & Luo, 2018). The separation of ownership and control
gives managers discretionary power to use resources based on their
preferences (Fama & Jensen, 1983). Thus, we control for separation,
which is calculated as the difference value between the ownership and
control rights of a firm’s actual controllers.
Second, we control for the characteristics of the CEO and the board.
A CEO’s discretionary power increases as his or her tenure lengthens or
when he or she is also chairperson (Van Essen, Otten, & Carberry,
2015). Thus, we control for CEO tenure, which is the total number of
years in position; and CEO duality, which equals “1” if the CEO and
chairperson are the same people and “0” otherwise. Similarly, the high
level of CEO pay can be the result of a powerful CEO, who possesses
more discretionary power to allocate firms’ resources on their own in-
terests that increase agency costs (Morse, Nanda, & Seru, 2011).
However, high compensation may motivate CEOs to align their interests
with firm performance because they are often rewarded based on firm
financial performance (Hwang & Kim, 2009). We thus control for CEO
pay, which is measured as the logarithm of the CEO’s salary, bonus, and
long-term incentives (Cao et al., 2019; Bergstresser & Philippon, 2006;
Lee, Cho, Arthurs, & Lee, 2019). Following Bergstresser and Philippon
(2006), we calculate the total value of long-term incentives (stock op-
tions, restricted stocks, shares, and other long-term incentives) by
multiplying the total number of these incentives with the closing stock
price in a given year. Politically tied managers are less likely to pursue
self-interests behavior in consideration of reputation and risk. CEO
political ties entails that the CEO is an official of government agencies,
the National People’s Congress, or the Chinese People’s Political Con-
sultative Conference (Sun et al., 2016). In accordance with prior studies
(Liu et al., 2015; Zona, Gomez-Mejia, & Withers, 2018), we also control
for the following board characteristics that are closely associated with
the effectiveness of board monitoring: board size (number of board
members), board interlocks (number of external directorships), board
political ties (the number of politically tied directors divided by board
size), board independence (the number of independent directors divided
by board size), and meeting attendance (logarithm of total meetings at-
tended by independent directors).
Third, previous studies demonstrate that the demographic similarity
between the CEO and the board may lead to similarity attraction and
6
However, empirical results of Ang et al. (2000) show younger firms are
more efficient, which is consistent with our results.
L. Zhang, et al.
influence the decisions of either party (Westphal & Stern, 2007;
Westphal & Zajac, 1995; Zhu & Westphal, 2014). Age dissimilarity is
calculated as the deviation between the CEO’s age and the board’s mean
age. Women are rarely part of managerial teams; hence, they tend to
classify each other into a group (Westphal & Stern, 2007). Thus, we
control for gender similarity, which is measured as the number of di-
rectors with the same gender (i.e., female) to the CEO divided by board
size. Education similarity is computed as the number of directors with
similar education levels to the CEO divided by board size. Function si-
milarity equals the number of directors with a similar functional back-
ground to the CEO divided by board size. We first collect the CEO and
directors’ biographical sketches from CSMAR and then use a number of
keywords (e.g., serve, soldier, army, navy, air force) to identify whether
the CEO and the directors have military experience (Luo, Xiang, & Zhu,
2017). Military similarity is calculated as the number of directors with
similar military experience to the CEO divided by board size. Based on
the biographical information, we calculate alumni similarity as the
number of directors who graduated from the same college or university
as the CEO divided by board size. Finally, we include institutional de-
velopment of the province in which a firm is headquartered, which is
defined as the logarithm of the province’s GDP divided by its population
(acquired from CSY) (Marquis & Qian, 2014).
4.6. Estimation methods
Given our panel dataset, we use a firm fixed effects model to test our
hypotheses. This model can eliminate the potential endogeneity that
arises from omitted time-invariant firm characteristics. An F-test con-
firms that a firm fixed effects model is better than a pooled regression
model (p = 0.00). We further perform the Hausman (1978) specifica-
tion test, which confirms that a firm fixed effects model is more ap-
propriate than a random effects model (p = 0.00).
In addition, we allow a one-year lag between the dependent vari-
ables and all explanatory variables. We winsorize the top and bottom
1% of all continuous variables to avoid undue effects from outliers.
Specifically, we use the following model to test H1:
Agency costsi, t
= 0 + 1 surname tiesi, t 1 + 2 Xi, t 1 + (year and firm fixed effects ) +
where i and t denote firm and year, respectively. X is a vector of con-
trols, β is the regression coefficient, and ε is the error term. According to
H1, the coefficient of β1 is positive.
To test H2, H3, and H4, we use the following model:
Agency costsi, t
= 0 + 1 surname tiesi, t 1 + 2 surname
3 Xi, t 1 + (year and firm fixed effects ) +
where moderator can be shareholder monitoring, supervisor share, or di-
rector share. Consistent with H2 (or H3 or H4), β2 should be negative.
5. Results
Table 1 shows the descriptive statistics and the Pearson correlations
of all variables. Because significant correlations exist among several
variables, we compute variance inflation factors (VIFs) to investigate
whether a potential multicollinearity problem exists. The maximum VIF
in the regression model is 1.95 (director share), and the mean VIF is
1.26, which is below the rule-of-thumb cutoff of 10. Hence, multi-
collinearity is not a concern. Among 165,287 directors, 6,012 directors
share surnames with the CEO (approximately 4%).
Table 2 reports the regression results. Model 1 only includes control
variables, whereas Model 2 includes the independent variable. In the
subsequent Models 3, 4, and 5, we add the interaction terms between
Journal of Business Research 118 (2020) 271–285
surname ties and moderating variables. Model 6 is the full model.
H1 posits that CEO–board surname ties are positively associated
with agency costs. As shown in Model 2, the coefficient of surname ties is
positive and significant (β = 0.03, p < 0.01), thus strongly supporting
H1. The marginal effect of surname ties is 0.03, suggesting that an in-
crease in surname ties by one level leads to a 3% increase in agency costs.
H2 assumes that the effect of surname ties on agency costs is weaker
for firms with strong monitoring performed by shareholders. The in-
teraction effect of surname ties and shareholder monitoring on agency costs
is negative and significant in Model 3 (β = −0.23, p < 0.01). To fully
consider the nature of this relationship, we follow Aiken and West
(1991) and plot the moderating effect of shareholder monitoring on the
relationship between surname ties and agency costs in Fig. 1. The figure
illustrates that this relationship weakens as shareholder monitoring
strengthens. Thus, H2 receives support.
H3 assumes that the positive relationship between surname ties and
agency costs is weaker when directors’ interests are closely aligned with
firm value. The interaction effect of surname ties and director share on
agency costs is negative and significant in Model 4 (β = −0.11,
p < 0.05). Likewise, we plot this moderating effect in Fig. 2, which
displays that the effect of surname ties on agency costs becomes weak as
director share increases. Thus, H3 is supported.
H4 posits that H1 is weaker when supervisors’ private interests are
more aligned with firm value. The interaction effect of surname ties and
supervisor share on agency costs is negative and significant in Model 5
(β = −1.52, p < 0.05). Similarly, we plot the moderating effect of
supervisor share on the relationship between surname ties and agency
costs in Fig. 3, which shows that this relationship weakens as supervisor
share strengthens. Thus, H4 is supported.
6. Endogeneity and robustness tests
6.1. Propensity score matching (PSM) technique
We use PSM technique to mitigate “sample selection bias” caused by
observable factors (Dehejia & Wahba, 2002, p. 151).7 For example,
CEOs with high demographic similarity to directors likely appoint si-
milar directors (e.g., directors who share the same surname) and affect
agency costs (Westphal & Zajac, 1995). Following one-to-one non-re-
(1) placement matching principle, we match treated firms (firms with
CEO–board surname ties) with control firms (firms without CEO–board
surname ties) on all control variables. Finally, we obtain 4345 pairs of
treated and control firms. The differences between treated and control
firms are insignificant (p > 0.1), indicating good matching quality
(results can be requested from authors). Table 3 presents the regression
results that are based on the matched samples. As shown in Table 3, the
PSM results are consistent with those in Table 2.
tiesi, t 1 × moderatori, t 1 +
, (2) 6.2. Instrumental variable (IV) approach
We adopt the IV approach to address the potential endogeneity
problem between surname ties and agency costs, especially when CEOs or
directors in firms with high agency costs may appoint demographically
similar CEOs or directors. The results are shown in Table 4.
We use two IVs — (1) the mean of surname ties in a province (pro-
vince surname) and (2) the mean of surname ties in an industry (industry
surname). Province surname (or industry surname) is closely associated
with surname ties but is less likely to directly associated with agency
costs. We conduct several tests to confirm the validity of our IVs. First,
province surname (or industry surname) is positively and significantly
associated with surname ties (p < 0.01). The Kleibergen-Paap F-
7
We also used Heckman two-step sample selection model to rule out the
potential bias that surname-sharing directors may be appointed by the CEO to
assist his/her self-serving activities. Our results remain consistent.
277
 L. Zhang, et al.

Table 1
Descriptive Statistics and Pearson Correlations (Note. * denotes statistical significant at 5% level. N = 16,926).
Variables Mean S.D. Min Median Max 1 2 3 4 5 6 7 8 9 10 11

1. Agency costs −2.11 0.77 −4.51 −2.08 0.46 1

2. Surname ties 0.26 0.44 0 0 1 0.03* 1
3. Shareholder monitoring 0.37 0.15 0.09 0.35 0.75 −0.20* 0.01 1
4. Director share 0.08 0.17 0 0 0.65 0.19* 0.10* −0.10* 1
5. Supervisor share 0.002 0.01 0 0 0.06 0.10* 0.04* −0.13* 0.42* 1
6. Firm size 21.71 1.21 18.76 21.56 25.99 −0.37* −0.03* 0.23* −0.21* −0.13* 1
7. Firm age 12.71 5.07 0 12 28 −0.03* −0.01 −0.20* −0.23* −0.14* 0.16* 1
8. ROA 0.01 0.05 −0.4 0.003 0.23 −0.09* −0.02* 0.10* 0.08* 0.06* 0.04* −0.09* 1
9. Growth 0.47 1.6 −0.95 0.11 12.37 0.01 −0.02* 0.02* −0.03* −0.02* 0 0.09* −0.01 1
10. Separation −0.05 0.08 −0.29 0 0 0.02* 0 −0.11* 0.22* 0.09* 0 −0.01 −0.02* 0.01 1
11. CEO tenure 2.42 2.26 0 1.67 10.75 0.08* 0.02* −0.06* 0.10* 0.05* 0.10* 0.17* 0.01 −0.02* 0.02* 1
12. CEO duality 0.2 0.4 0 0 1 0.14* 0.10* −0.07* 0.26* 0.11* −0.13* −0.06* 0.01 0 0.03* 0.13*
13. CEO pay 11.71 3.69 0 12.78 15 0.01 0.03* −0.11* 0.12* 0.06* 0.13* 0.15* 0.02* −0.02* 0 0.17*
14. CEO political ties 0.16 0.37 0 0 1 0.03* 0.10* −0.02* 0.10* 0.05* −0.02* −0.07* 0.04* −0.01 0.01 0.05*
15. Board size 9.08 1.85 5 9 15 −0.11* 0.01 0.02* −0.19* −0.06* 0.25* −0.04* 0.01 −0.05* 0 −0.05*
16. Board interlocks 8.57 9.24 0 6 52 −0.01 0.03* 0.06* 0.04* 0.03* 0.18* −0.05* 0.05* −0.05* −0.08* 0.11*
17. Board political ties 0.26 0.2 0 0.22 1 −0.02* 0.05* 0 0.06* 0.03* 0.01 −0.11* 0.03* 0.01 0.02* −0.07*
18. Board independence 0.36 0.05 0 0.33 0.56 0.02* 0.01 0.02* 0.12* 0.01 0.05* 0.03* −0.02* 0.03* 0.06* 0.06*
19. Meeting attendance 3.31 0.4 2.3 3.33 4.39 −0.06* 0.01 −0.03* 0.01 −0.01 0.29* 0.07* −0.05* 0.04* 0.02* −0.02*

278
20. Age dissimilarity 5.17 3.4 0.1 4.33 18 −0.01 0.08* 0.01 0.01 −0.01 0.01 −0.02* 0.01 −0.01 −0.05* −0.05*
21. Gender similarity 0.01 0.05 0 0 0.67 0.03* 0.02 −0.03* 0.05* −0.01 −0.03* 0.03* 0.01 0.03* 0.01 0.02*
22. Education similarity 0.32 0.26 0 0.3 2.2 0.05* −0.01 0.03* 0.22* 0.13* −0.04* −0.19* 0.06* −0.05* 0.02* 0.07*
23. Function similarity 0.64 0.38 0 0.67 2.5 0.02* 0.05* −0.05* 0.17* 0.09* 0.13* 0.21* −0.04* 0.02* 0.02* 0.14*
24. Alumni similarity 0.004 0.03 0 0 0.55 0.10* −0.01 −0.03* 0.11* 0.07* −0.01 −0.05* 0.01 0.01 0.02* 0.03*
25. Military similarity 0 0.01 0 0 0.33 0 −0.01 0 0.01 0.01 −0.01 −0.01 0 0 0 0.03*
26. Institutional development 10.53 0.63 8.37 10.61 11.65 0.06* 0.05* −0.03* 0.23* 0.11* 0.18* 0.24* 0 0.01 0.04* 0.28*
12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

12. CEO duality 1

13. CEO pay 0.04* 1
14. CEO political ties 0.23* 0.01 1
15. Board size −0.16* −0.07* −0.02* 1
16. Board interlocks 0.04* 0.14* 0.03* 0.09* 1
17. Board political ties 0.04* 0.01 0.40* −0.02* 0.04* 1
18. Board independence 0.10* 0.09* 0.02* −0.36* −0.01 0.07* 1
19. Meeting attendance −0.02* 0.14* 0.02 0.28* 0.14* 0.05* 0.17* 1
20. Age dissimilarity −0.06* −0.04* 0 −0.01 0 0.06* 0 −0.04* 1
21. Gender similarity −0.02 0.02* 0.02* −0.04* −0.01 −0.01 0.02* 0 0 1
22. Education similarity 0.12* 0.04* 0.07* −0.09* 0.09* 0.15* 0.03* 0 −0.05* 0.02* 1
23. Function similarity 0.12* 0.35* 0.04* −0.14* 0.15* 0.12* 0.12* 0.16* −0.03* 0.03* 0.13* 1
24. Alumni similarity 0.06* 0.05* 0.01 −0.02* 0.04* 0.02* 0.01 0.04* −0.04* −0.01 0.13* 0.06* 1
25. Military similarity −0.01 0.01 0 0.01 0.01 0.02* 0 0 −0.02* 0.03* 0.02* 0.01 0.04* 1
26. Institutional development 0.14* 0.35* 0 −0.14* 0.22* −0.04* 0.13* 0.13* −0.03* 0.02* 0.03* 0.42* 0.07* 0.01 1
Journal of Business Research 118 (2020) 271–285
L. Zhang, et al. Journal of Business Research 118 (2020) 271–285

Table 2
Results of the Effect of Surname Ties on Agency Costs.
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

*** *** *** ***

Surname ties H1 0.03 0.03 0.03 0.03 0.03***
(0.01) (0.01) (0.01) (0.01) (0.01)
Surname ties × H2 −0.23*** −0.24***
Shareholder monitoring (0.06) (0.06)
Surname ties × H3 −0.11** −0.11*
Director share (0.05) (0.06)
Surname ties × H4 −1.52** −1.04
Supervisor share (0.65) (0.75)
Shareholder monitoring −0.34*** −0.34*** −0.34*** −0.34*** −0.34*** −0.34***
(0.07) (0.07) (0.07) (0.07) (0.07) (0.07)
Director share −0.04 −0.04 −0.04 −0.03 −0.04 −0.03
(0.09) (0.09) (0.09) (0.09) (0.09) (0.09)
Supervisor share 0.37 0.35 0.28 0.37 0.42 0.33
(0.68) (0.68) (0.68) (0.68) (0.68) (0.69)
Firm size −0.11*** −0.11*** −0.11*** −0.11*** −0.11*** −0.11***
(0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
Firm age 0.12*** 0.12*** 0.12*** 0.12*** 0.12*** 0.12***
(0.03) (0.03) (0.03) (0.03) (0.03) (0.03)
ROA −0.31*** −0.31*** −0.30*** −0.31*** −0.31*** −0.30***
(0.11) (0.11) (0.11) (0.11) (0.11) (0.11)
Growth −0.01** −0.01** −0.01** −0.01** −0.01** −0.01**
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Separation 0.05 0.05 0.05 0.05 0.05 0.05
(0.09) (0.09) (0.09) (0.09) (0.09) (0.09)
CEO tenure 0.01*** 0.01*** 0.01*** 0.01*** 0.01*** 0.01***
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
CEO duality 0.03** 0.03** 0.03** 0.03** 0.03** 0.03**
(0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
CEO pay −0.00 −0.00 −0.00 −0.00 −0.00 −0.00
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
CEO political ties −0.01 −0.01 −0.01 −0.01 −0.01 −0.01
(0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
Board size −0.00 −0.00 −0.00 −0.00 −0.00 −0.00
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Board interlocks 0.00 0.00 0.00 0.00 0.00 0.00
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Board political ties −0.08*** −0.08*** −0.08*** −0.08*** −0.08*** −0.08***
(0.03) (0.03) (0.03) (0.03) (0.03) (0.03)
Board independence −0.17 −0.17 −0.18* −0.18* −0.17 −0.18*
(0.11) (0.11) (0.11) (0.11) (0.11) (0.11)
Meeting attendance −0.00 −0.00 −0.00 −0.00 −0.00 −0.00
(0.01) (0.01) (0.01) (0.01) (0.01) (0.01)
Age dissimilarity 0.00 0.00 0.00 0.00 0.00 0.00
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Gender similarity 0.34** 0.34** 0.34** 0.34** 0.34** 0.35**
(0.14) (0.14) (0.14) (0.14) (0.14) (0.14)
Education similarity −0.01 −0.01 −0.01 −0.01 −0.01 −0.01
(0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
Function similarity −0.01 −0.01 −0.01 −0.01 −0.01 −0.01
(0.02) (0.02) (0.02) (0.02) (0.02) (0.02)
Alumni similarity −0.02 −0.02 −0.03 −0.02 −0.02 −0.03
(0.09) (0.09) (0.09) (0.09) (0.09) (0.09)
Military similarity 0.14 0.14 0.15 0.14 0.15 0.16
(0.41) (0.41) (0.41) (0.41) (0.41) (0.41)
Institutional development 0.04 0.04 0.04 0.04 0.04 0.04
(0.04) (0.04) (0.04) (0.04) (0.04) (0.04)
Constant −0.70 −0.69 −0.68 −0.69 −0.69 −0.68
(0.50) (0.50) (0.50) (0.50) (0.50) (0.50)
F 14.97*** 14.81*** 14.86*** 14.49*** 14.51*** 14.21***
Adjust R2 0.80 0.80 0.80 0.80 0.80 0.80

Notes. N = 16,926. Robust standard errors are reported in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01. Firm and year effects are included in all models.

statistics of 174.03 is statistically significant (p-value is far below 0.1
because the Stock-Yogo weak ID test critical value in the 10% maximal
IV size is 19.93). Thus, our models are not subject to weak instrument
problems. Second, the Hansen J statistics is insignificant (p = 0.22),
which indicates that our instruments are exogenous and uncorrelated
with the error terms. In the second stage regression, Table 4 shows that
surname ties is still positively and significantly correlated with agency
costs.
6.3. Robustness checks
We conduct additional tests to establish the robustness of our re-
sults. First, we perform several tests by changing the proxies for our key
variables. We remeasure surname ties by counting the number of di-
rectors with the same surname as the CEO. We also remeasure agency
costs as the ratio of total annual sales to total assets (RATIO). A high
ratio indicates a low agency cost (He & Luo, 2018; Singh & Davidson,

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Table 3
Endogeneity Test Using PSM.
Variables Model 1 Model 2 Model 3 Model 4 Model 5

** ** ** **
Surname ties 0.03 0.04 0.03 0.03 0.03**
(0.02) (0.02) (0.01) (0.02) (0.01)
Surname ties × −0.27*** −0.28***
Shareholder monitoring (0.09) (0.09)
Surname ties × −0.14** −0.14*
Director share (0.07) (0.08)
Surname ties × −1.49* −0.84
Supervisor share (0.88) (1.05)
Constant −0.976 −0.948 −0.971 −0.978 −0.943
(0.865) (0.864) (0.865) (0.865) (0.864)
Control variables Yes Yes Yes Yes Yes
F 8.92*** 8.93*** 8.87*** 8.77*** 8.74***
Adjust R2 0.82 0.82 0.82 0.82 0.82

Notes. N = 8,708. Control variables are the same as those in Table 2. Robust
standard errors are reported in parentheses. * p < 0.10, ** p < 0.05, ***
Fig. 1. Moderating effect of shareholder monitoring.
p < 0.01. Firm and year fixed effects are included in all models.

Table 4
Endogeneity Test Using IV Approach.
Panel A Second-Stage Regression Model 1

Surname ties 0.18***

(0.009)
Control variables Yes
Firm and year fixed effects Yes
N 16,841
F 14.84***
R2 0.067
Adjust R2 −0.13

Panel B First-Stage Regression (firm fixed effects)

Industry surname 0.70*** (0.00)
Province surname 0.81*** (0.00)
Test of weak identification: Kleibergen-Paap F-statistics 174.03
Stock-Yogo weak ID test critical values:
10% maximal IV size 19.93
15% maximal IV size 11.59
Fig. 2. Moderating effect of director share. Test of overidentification: Hansen J statistics 1.53 (p-value = 0.22)

Notes. Control variables are the same as those in Table 2. Robust standard er-
rors are reported in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01 We
use STATA’s command “xtivreg2, fe gmm robust”. Because singleton groups are
detected, 85 observations are not used.

Table 5
Results of Remeasuring Surname Ties.
Variables Model 1 Model 2 Model 3 Model 4 Model 5

Surname ties 0.02*** 0.02** 0.02** 0.02** 0.02**

(0.01) (0.01) (0.01) (0.01) (0.01)
Surname ties × −0.14*** −0.15***
Shareholder monitoring (0.04) (0.04)
Surname ties × −0.10*** −0.09**
Director share (0.03) (0.04)
Surname ties × −1.16*** −0.74
Supervisor share (0.42) (0.47)
Constant −0.69 −0.68 −0.68 −0.69 −0.67
(0.50) (0.50) (0.50) (0.50) (0.50)
Fig. 3. Moderating effect of supervisor share. Control variables Yes Yes Yes Yes Yes
F 14.75*** 14.66*** 14.50*** 14.49*** 14.13***
Adjust R2 0.80 0.80 0.80 0.80 0.80
2003). These results shown in Tables 5 and 6 are highly consistent with
our arguments. Notes. N = 16,926. Control variables are the same as those in Table 2. Robust
Second, we argue that directors with the same surname as the CEO standard errors are reported in parentheses. * p < 0.10, ** p < 0.05, ***
are biased in evaluating the CEO’s competence and thus these directors p < 0.01. Firm and year fixed effects are included in all models.
pay the CEO excessive salaries and bonuses. If this argument is true,
then surname ties increases CEO pay and decreases CEO pay–- Following Cao et al. (2019), we employ four industry adjusted
performance sensitivity (Gupta & Wowak, 2017; Lee et al., 2014). variables to measure firm performance: ROA, ROS (the ratio of net in-
Boivie et al. (2011) also use an increased value for CEO pay to proxy come to total sales), Tobin’s Q (the ratio of market capitalization to total
high agency costs. assets), and stock returns (the annual change in stock prices).

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Table 6 Table 8
Results of Remeasuring Agency Costs. Results of CEO-Director Pairs.
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Variables Model 1 Model 2 Model 3 Model 4 Model 5

** ** ** *** *** *** ***

Surname ties −0.01 −0.01 −0.01* −0.01 −0.01* Surname ties 0.01 0.01 0.01 0.01 0.01***
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
Surname ties × −0.01 −0.00 Surname ties × −0.07*** −0.08***
Shareholder monitoring (0.03) (0.03) Shareholder (0.03) (0.03)
Surname ties × 0.06** 0.06* monitoring
Director share (0.03) (0.03) Surname ties × −0.05*** −0.05***
Surname ties × 0.35 −0.03 Director share (0.02) (0.02)
Supervisor share (0.29) (0.34) Surname ties × −0.61*** −0.46**
Constant 1.15*** 1.15*** 1.14*** 1.15*** 1.14*** Supervisor share (0.21) (0.23)
(0.30) (0.30) (0.30) (0.30) (0.30) Control variables Yes Yes Yes Yes Yes
Control variables Yes Yes Yes Yes Yes Constant −0.48*** −0.48*** −0.48*** −0.48*** −0.48***
F 18.93*** 18.51*** 18.00*** 18.25*** 18.02*** (0.15) (0.15) (0.15) (0.15) (0.15)
Adjust R2 0.81 0.81 0.81 0.81 0.81 N (the number of 165,287 165,287 165,287 165,287 165,287
directors)
Notes. N = 16,926. Control variables are the same as those in Table 2. Robust F 156.24 152.18 152.05 152.04 144.41
standard errors are reported in parentheses. * p < 0.10, ** p < 0.05, *** Adjust R2 0.83 0.83 0.83 0.83 0.83
p < 0.01. Firm and year fixed effects are included in all models.
Notes. Control variables are the same as those in Table 2. Robust standard er-
rors are reported in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01. Firm
Table 7
and year fixed effects are included in all models.
Influence of Surname Ties on CEO Pay and CEO Pay–Performance Sensitivity.
Variables Model 1 Model 2 Model 3 Model 4 Model 5 7. Further analyses
DV CEO pay CEO pay CEO pay CEO pay CEO pay

Surname ties 0.11* 0.11* 0.11* 0.09 0.10* 7.1. Surname ties and firm performance
(0.06) (0.06) (0.06) (0.06) (0.06)
Surname ties × ROA −1.46* Given that CEO–board surname ties restrict board monitoring and
(0.88)
increase agency costs, such ties may be harmful to firm performance. As
ROA 2.80***
(0.70)
stated above, we still use the four variables (i.e., ROA, ROS, Tobin’s Q,
Surname ties × ROS −0.64** and stock returns) to measure firm performance. Consistent with our
(0.27) predictions, Models 1–2 of Table 9 show that surname ties is negatively
ROS 0.50*** and significantly associated with accounting performance (ROA and
(0.18)
ROS).
Surname ties × Tobin’s Q −0.03
(0.04)
Tobin’s Q 0.13***
7.2. Potential benefits of surname ties
(0.03)
Surname ties × Stock −0.00
returns The board of directors has dual roles: monitoring and advising
(0.00) (Adams & Ferreira, 2007; Raheja, 2005). In the context of agency costs,
Stock returns 0.00
we focus on the board’s monitoring role. Further, we test whether di-
(0.00)
Control variables Yes Yes Yes Yes Yes
rectors’ surname ties influence the effectiveness of their advising. Di-
Constant −4.91 −4.91 −4.92 −6.72* −4.51 rectors who have social similarities with the CEO may perform their
(4.01) (4.01) (4.01) (4.08) (4.01) advisory role better because social similarities likely facilitate in-
N 16,926 16,926 16,926 16,926 16,926 formation sharing, reduce conflicts, and lead to a fast and timely de-
F 92.24*** 89.73*** 89.67*** 90.49*** 89.94***
cision-making process (Bernile, Bhagwat, & Yonker, 2018; Gompers
Adjust R2 0.66 0.66 0.66 0.66 0.66
et al., 2016). Given that firms can benefit from managers’ quick re-
Notes. Control variables include shareholder monitoring, director share, su- sponses and fast decision making in a dynamic or volatile environment,
pervisor share, firm size, firm age, ROA, growth, separation, CEO tenure, CEO we expect the negative effect of surname ties on firm performance to be
duality, CEO political ties, board size, board interlocks, board political ties, smaller when firms operate in a dynamic industry.8 Consistent with our
board independence, meeting attendance, age dissimilarity, gender similarity, arguments, Models 5–6 of Table 9 presents that the coefficients of the
education similarity, function similarity, military similarity, alumni similarity, interaction term (surname ties × dynamism) on ROA and ROS are
institutional development. Robust standard errors are reported in parentheses. * positive and significant.
p < 0.10, ** p < 0.05, *** p < 0.01. Firm and year fixed effects are included
in all models.
7.3. Surname ties and board appointments
Accounting performance is expected to “deliver more consistent and
robust results than stock market performance” because stock market As previously argued, surname ties result in directors’ biased eva-
trading in China reflects little information and is noisy (Cao et al., 2019, luation of the CEO. We further investigate the incentives of directors
p. 2952). In line with our arguments, Table 7 shows that surname ties is that motivate them to engage in this collusive behavior, which likely
positively associated with CEO pay. The coefficient of the interaction damages their reputation in the director labor market and the reputa-
term between surname ties and accounting performance (i.e., ROA and tion of the surname-ties group. Based on Westphal and Stern (2007), we
ROS) on CEO pay is negative and significant. expect that directors may not care about such negative consequences
Finally, we construct a sample of 165,287 CEO-director pairs to
further support our argument that CEO–board surname ties increase a 8
Following Pathak, Hoskisson, and Johnson (2014), we calculate industry
firm’s agency costs. Specifically, we merge each director with the cor-
dynamism by regressing time on industry gross revenues for the previous five
responding CEO and firm-level data. As presented in Table 8, the results
consecutive years, and dividing the standard error of the regression slope
are consistent with all hypotheses. coefficient by the average value of the five-year industry revenues.

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Table 9
Effects of Surname Ties and Industry Dynamism on Firm Performance.
Variables Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8
DV ROA ROS Tobin’s Q Stock returns ROA ROS Tobin’s Q Stock returns

Surname ties −0.00** −0.01** −0.01 −0.07 −0.00** −0.01** −0.01 −0.07
(0.00) (0.00) (0.02) (0.13) (0.00) (0.00) (0.02) (0.13)
Surname ties × 0.03** 0.13** 0.22 1.40
Dynamism (0.01) (0.06) (0.36) (2.44)
Dynamism 0.01 0.10** 0.06 −1.14
(0.01) (0.04) (0.26) (1.76)
Control variables Yes Yes Yes Yes Yes Yes Yes Yes
Constant 0.19*** 0.35** 15.87*** 52.34*** 0.19*** 0.34* 15.87*** 52.63***
(0.05) (0.17) (1.13) (7.68) (0.05) (0.17) (1.13) (7.69)
Control variables Yes Yes Yes Yes Yes Yes Yes Yes
F 21.57*** 14.47*** 78.87*** 13.85*** 20.56*** 13.99*** 74.61*** 13.12***
N 16,926 16,926 16,485 16,901 16,926 16,926 16,485 16,901
Adjust R2 0.37 0.21 0.57 0.03 0.37 0.21 0.57 0.03

Notes. Control variables are the same as those in Table 2. Robust standard errors are reported in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01. Firm and year
fixed effects are included in all models.

because directors with the same surname as the CEO can obtain addi- Table 10
tional board appointments. Effect of Surname Ties on Board Appointment and Effect of Surname Ties Based
Models 1–2 of Table 10 show that surname ties is positively and on Dialect Similarity on Agency Costs.
significantly associated with board appointment,9 and this effect be- Variables Model 1 Model 2 Model 3 Model 4
comes stronger for higher-value CEO interlock (i.e., the CEO has more DV Director Director Agency costs Agency costs
networks).10 These results suggest that the CEO helps surname-sharing appointment appointment
directors obtain additional appointments in exchange for their favor-
Surname ties 0.35*** 0.34*** 0.02*
itism.11 (0.03) (0.03) (0.01)
Surname ties × 0.04***
7.4. Surname ties based on dialect similarity CEO interlocks (0.01)
CEO interlocks 0.12***
(0.00)
As another ascribed or innate social tie, we expect that CEO–board Same-surname- 0.05***
dialect similarity strengthens the effect of surname ties on agency costs. dialect
Language is the sign or a carrier of an individual’s social identity (0.01)
(Gumperz, Drew, & Goodwin, 1982; Tong, Hong, Lee, & Chiu, 1999). Difference- −0.03
surname-
Dialect can be a particularly important dimension of cultural and social
dialect
identity due to its inheritance and immutability (Chen, Lu, & Xu, 2014). (0.02)
Drawing on social identity theory, we argue that the CEO and directors Control Yes Yes Yes Yes
may also classify one another into the same social group based on their variables
Constant 0.42 0.77 −3.57*** −3.56***
shared dialect. Hence, when directors share the same surname and
(0.67) (0.66) (0.68) (0.68)
dialect with the CEO, in-group favoritism becomes severe and agency Control Yes Yes Yes Yes
costs increase. variables
We obtain the country-level dialect data from Sun Yat-Sen F 151.06*** 189.59*** 13.04*** 12.97***
University, where Liu, Xu, and Xiao (2015) manually collected this data N (the number 165,287 165,287 9922 9922
of directors)
from the Language Atlas of China and The Great Dictionary of Chinese
Adjust R2 0.20 0.21 0.87 0.87
Dialects. Chinese can be classified into different dialects, which include
10 supergroups, 20 groups, and 105 sub-groups. China has 34 pro- Notes. Control variables are the same as those in Table 2. Robust standard er-
vinces, 294 cities, and 2876 countries. According to the dialect dataset, rors are reported in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01. Firm
Chinese people from different cities (the same provinces) may speak the and year fixed effects are included in all models.
same dialect (different dialects). To identify whether directors share the
same dialect with the CEO, we first collect the birthplace of CEOs and speak the same dialect (different dialects)12 and “0” otherwise. Con-
directors from the CSMAR database and then merge them with the sistent with our arguments, Model 4 of Table 10 shows that the coef-
dialect that people speak in the place. We obtain 9922 CEO-director ficient of same-surname-dialect is positive and significant, but difference-
pairs who have birthplace information related to the city and province. surname-dialect has an insignificant coefficient.
Second, we construct same-surname-dialect (difference-surname-dialect)
that equals “1” if a CEO and a director share the same surname and
8. Discussion and conclusion

9
Board appointment is measured as the number of a director’s external di-
rectorships (Zona et al., 2018).
10
CEO interlock is calculated as the number of a CEO’s external directorships
(Zona et al., 2018).
11
Another reason is likely that directors obtain higher pay. Further analysis
reveals that CEO-board surname ties help directors, who are also members of
top member team (TMT), receive higher compensation. A CEO is the first one to
evaluate other executives in TMT and determine their pay (Chin & Semadeni,
2017). This relationship becomes strong when the CEO has greater power. The
proxies for CEO power are CEO duality, CEO shareholding, and CEO tenure.
Although corporate governance literature has long recognized the
impact of acquired social ties on governance outcomes, we know little
about innate social ties. Such ties often accompany people throughout
life, shape their social identities, and impact their interactions with
others. Moreover, the findings regarding the relationship between
12
Because the birthplace information related to city and province is avail-
able, we can only identify whether CEOs and directors speak the same dialect
belonging to the 20 groups.

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L. Zhang, et al. Journal of Business Research 118 (2020) 271–285

social ties and governance outcomes are equivocal and contradictory.
To fill these gaps, this study draws on social identity theory and agency
theory to examine (1) whether and how CEO–board surname ties in-
fluence agency costs, and (2) the boundary conditions under which
such directors are less likely to act as group members of surname ties.
Consistent with our arguments, we find that such ties increase agency
costs. This relationship weakens when firms have strong monitoring by
shareholders and when directors’ or supervisors’ interests are closely
aligned with firm value. As such, our findings indicate that directors
tend to act as social group members when they share the same surname
with the CEO. Such directors are more likely to act economically when
they face monitoring from shareholders or supervisors or when their
interests are aligned with firm value.
Our further analyses suggest that CEO–board surname ties lower
firm performance but have potential benefits for firms operating in a
dynamic environment. Directors with the same surname as the CEO can
acquire additional board appointments. Such ties based on dialect si-
milarity exacerbate in-group favoritism and result in increased agency
costs.
8.1. Theoretical contributions
This study has several contributions to corporate governance lit-
erature. First, this study complements and extends corporate govern-
ance literature by introducing CEO–board surname ties and examining
how such ties affect governance outcomes. Behavioral perspectives on
corporate governance have emphasized the role of socio-psychological
factors, such as social ties among decision makers (Gupta & Wowak,
2017; Westphal & Zajac, 2013). As such, numerous studies examine
how the achieved or acquired social ties between a CEO and directors
influence governance outcomes (Fracassi & Tate, 2012; Hwang & Kim,
2009). However, little attention has been given to ascribed or innate
social ties, which have substantial implications among managers (Kish-
Gephart & Campbell, 2015). Recently, Du (in press) extends audit lit-
erature by examining how surname ties affect auditor behavior. How-
ever, the effect of surname ties on corporate governance outcomes re-
mains unexplored. This study fills this gap by examining how
CEO–board ties increase agency costs.
In addition, this study adds to the literature on the determinants of
owner-manager agency costs by taking surname ties into account. Most
studies examine how formal systems, such as board structure and
managerial incentives, restrain managers from performing unethical
behaviors and reduce agency costs (e.g., Rashid, 2015; Singh &
Davidson, 2003). Scholars have recently recognized and called for ad-
ditional studies on the role of informal systems, including social norms
and cultural factors (Du, Weng, Zeng, & Pei, 2017; Fidrmuc & Jacob,
2010). As a response to this call, we examine whether and how clan
culture based on surname ties influences agency costs.
Second, this study contributes to behavioral governance literature
by identifying boundary conditions under which socially situated and
constituted agencies are likely to act economically (Hillman et al.,
2008; Westphal & Zajac, 2013).13 To better understand the diverse
findings regarding the effect of social-psychological factors (e.g., social
ties) on governance outcomes (e.g., Hwang & Kim, 2009; Gompers
et al., 2016), we consider agencies’ economic rationality as a boundary
condition of this relationship. Because directors act not only as group
members of social ties but also as rational agents of owners (Hillman
et al., 2008), the limited influence of social-psychological factors can be
attributed to economic rationality. However, previous studies explored
directors’ social and economic roles separately. Despite shedding va-
luable insights into when agencies are more likely to act as social actors
(Du, in press; Westphal & Zajac, 2013), existing accounts have exerted
13
We sincerely appreciate that both reviewers inspire us to articulate this
contribution.
less attention to when and why the agencies are less likely to be group
members of social ties but act as rational agents.
To fill this gap, we use agency theory to consider three key gov-
ernance tools. Our findings suggest that directors who share the same
surnames as the CEO are less likely to act as group members of surname
ties but as rational representatives of shareholders when facing mon-
itoring from shareholders and supervisors or when their interests are
closely aligned with firm value. As such, this study provides a complete
picture of how directors perform their social and economic roles and
thus influence governance outcomes. Integrating social identity theory
with agency theory, we provide an example to examine the interactions
between directors’ social and economic roles. Doing so helps to un-
derstand when and why directors are likely to act as social actors or
rational agents. Our findings indicate that directors tend to be socially
situated and constituted actors due to their surname ties. Such directors
are also likely to act economically in the face of corporate governance
tools.
Third, this study extends the literature on surname ties. Although
prior literature suggests that surname ties elicit group and social
identity or in-group favoritism (Charness & Gneezy, 2008; Du, in press),
little is known about why such favoritism occurs, how to reduce fa-
voritism behavior, and the potential benefits of surname ties. Our
findings suggest that corporate governance tools can reduce the effect
of CEO-board surname ties. Our further analyses indicate that surname-
sharing directors may show favoritism toward the CEO because they
tend to obtain additional board appointments in the director labor
market with the help of the CEO. Further, our analyses suggest that
surname ties facilitate information sharing and accelerate the decision-
making process, both of which bring potential benefits for firms oper-
ating in a dynamic environment. In addition to surname ties based on
hometown relationships (Du, in press), our further analyses suggest that
such ties based on dialect similarity can also exacerbate in-group fa-
voritism.
8.2. Practical and policy implications
Our findings recommend that shareholders should focus on
CEO–board surname ties. Shareholders delegate boards of directors to
monitor executives because of imperfect information about managerial
behavior and contribution. However, some directors may not monitor
executives effectively, particularly, when directors with the same sur-
name as executives. Our findings suggest that CEO–board surname ties
inhibit board monitoring and result in increased agency conflicts and
costs.
Furthermore, our findings offer practical ways for shareholders and
policymakers to reduce the undesirable effects of CEO–board social ties.
First, our findings suggest that the undesirable effects of CEO–board
surname ties can be mitigated by the largest shareholders. However,
policymakers in the China Securities Regulatory Commission (CSRC)
should be careful with employing this tool because high ownership
concentration may lead to principal-principal agency problems (Sun
et al., 2016).
Second, our findings indicate that closely aligning directors’ inter-
ests with firm value can mitigate their biased evaluation of surname-
sharing CEO. Thus, to mitigate the effect of CEO–board social ties (e.g.,
surname ties), shareholders may consider increasing the board of di-
rectors’ shareholdings rather than adding outside directors to the board,
who are usually busy and have little power.
Third, aligning supervisors’ interests with firm value weakens the
positive relationship between CEO–board surname ties and agency
costs, suggesting that the supervisory board can effectively monitor
executives and boards of directors. To improve the effectiveness of
supervisory monitoring, policymakers in the CSRC should require firms
to increase supervisors’ shareholdings. For example, a supervisory
board should comprise additional shareholders’ representatives.

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8.3. Generalizability, limitations, and future research
Our findings are based on the empirical context of Chinese listed
firms, thus we must consider the generalizability of our results.
Specifically, our findings are grounded on two contextual conditions.
First, underdeveloped formal systems make interpersonal ties important
in the business environment. Second, people attach importance to clan
culture, surnames, or Chinese culture. Therefore, we expect that our
findings may also be supported in other Asian contexts (e.g., Korea and
Singapore). As such, future research can examine whether surname ties
matter in western countries. In addition, women’s surnames change
after marriage in some western countries (e.g., the US and UK). Future
research should consider the role of gender when examining surname
ties. Second, the governance tools (i.e., shareholders’ monitoring and
aligning directors’ or supervisors’ interests with firm value) that we
have identified are formal mechanisms. Future research can also con-
sider the role of informal mechanisms, such as ethical codes and cul-
tural factors (Du, 2016). Third, given that surname-sharing directors
tend to show biases toward the CEO, whether such directors consider
the CEO as superior among the group members of surname ties is an
interesting topic to investigate.
Declaration of Competing Interest
The authors declare that they have no known competing financial
interests or personal relationships that could have appeared to influ-
ence the work reported in this paper.
Acknowledgements
The authors appreciate Professor Santiago Mingo and the anon-
ymous reviewers for their insightful comments and suggestions. Liang
Zhang and Yeyao Ren appreciate their common supervisor during un-
dergraduate period, Professor Jianzu Wu, Lanzhou University. This
study was funded by grants from National Natural Science Foundation
of China (Grant No. 71672139; No. 71932007).

Appendix A. “One Hundred Surnames” lists (The ranking is based on the sixth national census)

Ranking 1 2 3 4 5 6 7 8 9 10
Surname 李 陈 刘 王 张 杨 赵 黄 周 吴
Ranking 11 12 13 14 15 16 17 18 19 20
Surname 郑 孙 胡 朱 高 林 何 郭 马 罗
Ranking 21 22 23 24 25 26 27 28 29 30
Surname 梁 宋 徐 谢 韩 唐 冯 于 董 萧
Ranking 31 32 33 34 35 36 37 38 39 40
Surname 程 曹 袁 邓 许 傅 沈 曾 彭 吕
Ranking 41 42 43 44 45 46 47 48 49 50
Surname 苏 卢 蒋 蔡 贾 丁 魏 薛 叶 阎
Ranking 51 52 53 54 55 56 57 58 59 60
Surname 余 潘 杜 戴 夏 锺 汪 田 任 姜
Ranking 61 62 63 64 65 66 67 68 69 70
Surname 范 方 石 姚 谭 廖 邹 熊 金 陆
Ranking 71 72 73 74 75 76 77 78 79 80
Surname 郝 孔 白 崔 康 毛 邱 秦 江 史
Ranking 81 82 83 84 85 86 87 88 89 90
Surname 顾 侯 邵 孟 龙 万 段 雷 钱 汤
Ranking 91 92 93 94 95 96 97 98 99 100
Surname 尹 黎 易 常 武 乔 贺 赖 龚 文

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Liang Zhang is a Ph.D. candidate at School of Management in Xi’an Jiaotong University.
His research interests include topics related to government-firm interactions, stakeholder
management, and corporate governance, he has published in the Management and
Organization Review, IEEE Transactions on Engineering Management, and Chinese
Management Studies, E-mail: 13772073171@163.com
Zhe Zhang is a Professor at School of Management in Xi’an Jiaotong University. Her
research interests include topics related to human resource management and corporate
social responsibility, she has published in the Human Relation, Human Resource
Management, and Management and Organization Review, E-mail: zhangzhe220@sina.com
Ming Jia is a Professor at School of Management in Northwestern Polytechnical
University. His research interests include topics related to corporate governance and
corporate social responsibility, he has published in the Journal of Management Studies,
Journal of Business Research, and Journal of Business Ethics. E-mail: jiaming@nwpu.edu.cn
Yeyao Ren is a jointly training Ph.D. student at School of Management in Xi’an Jiaotong
University and at College of Business in City University of Hong Kong. Her research in-
terests include topics related to on corporate governance, innovation, and en-
trepreneurship. E-mail: 18294413280@163.com